Saving the Euro Will Be Easier Than the Alternative: Clive Crook

Nov. 10 (Bloomberg) -- One thing nobody can say about the
euro-region crackup: We never saw this coming. We saw it coming,
all right. Europe’s currency area is falling apart at the very
fault lines skeptics described in detail when the plan was still
just a plan.

Sovereign-debt crises in peripheral countries? Collapsing
governance in Italy? German intransigence on “sound money” and
the role of the European Central Bank? Color me amazed.

Europe’s predicament was not just foreseeable but foreseen.
Yet Europe’s leaders chose not to plan for it. To do that would
have tempted fate and called their commitment to the project
into question. They preferred to say, with pride: There is no
Plan B. How impressed we all were. Unfortunately, that part was
true.

In one way, to be fair, the euro-visionaries who drove this
venture have been unlucky. Their system is being tested, perhaps
to destruction, 20 or 30 years too soon.

Their hope was that Europe’s new currency would speed the
development of a European political identity -- a necessary
condition for achieving their larger ambition, a United States
of Europe. Once Frenchmen, Germans, Italians and Greeks were
citizens of Europe first and of their own countries second, the
project would be strong enough to withstand shocks like those of
recent months or, better, would avoid them in the first place.

A Gamble

Actually, this made some sense. It was a gamble, but it
could have paid off. A European political identity was gradually
emerging. You don’t need to reflect long on 20th century history
to understand how valuable that would be. Closer political and
economic integration across the European Union -- adopting the
single currency was both at the same time -- would accelerate
the process, as well as delivering big economic benefits in the
interim.

Trouble was, it needed time to bed down. The institutions
of collective EU policy had already moved ahead of public
opinion. Adopting the single currency was never backed by most
Germans. In referendums elsewhere on EU constitutional
innovations, voters often needed to be asked more than once
before they got the right answer. European voters are accustomed
to being bossed around by their politicians, but even they have
their limits.

Popular support had to catch up before the institutions of
EU government could be developed much further. That would need
to happen for the euro to succeed. Europe’s elites were relaxed
about it: by now this was standard operating procedure. Thanks
to U.S. subprime mortgages, the test came too soon.

No Fiscal Union

Europe’s recent disarray arises from the governance gap
that this plan deliberately tolerated. Cycles of boom, bust and
acute fiscal stress in the peripheral countries happened, in
part, because the EU failed to insist on restraint when the new
euro members were first able to borrow on far better terms. Now,
in responding to the crisis, the EU is hobbled in the end
because there is no fiscal union. The question of national
identity has suddenly come clear -- nobody wants to pay taxes to
help foreigners.

The euro-visionaries’ grand strategic error was to try to
have it all. At certain critical points, the EU faced the choice
of (a) deepening the political integration of its existing
members and (b) broadening the membership to more distant
cultural neighbors with less advanced economies and less
reliable governments.

The right thing was to do one or the other. Build an ever
closer union of similarly advanced and like-minded countries,
willing to share a currency and pool their sovereignty; or
choose a wider but shallower union, akin to Nafta, confined
largely to free trade. The EU wanted both: deeper and wider.
That was the crucial error.

Few Choices Left

The question now is whether Europe still has those choices.
I seriously doubt it. The euro zone might collapse altogether --
currency unions have done so before -- but an orderly
dismantling is all but impossible to imagine.

What politicians have built, you might argue, politicians
can unbuild. It isn’t nearly so easy. When you put a currency
union together, parities are fixed. When you take one apart,
they are freed: Why else dismantle the union but to let exchange
rates move? That obvious asymmetry has large consequences. Who
would hold a deposit in an Italian bank if Italy were expected
to abandon the euro? The new lira, in which those deposits might
soon be denominated, would depreciate at the instant of its
creation. The mere prospect would trigger a systemwide bank run.

New Financial World

This is to say nothing of the vast legal and technical
complications that abandoning the euro would involve. When
previous currency unions collapsed, they did so in far simpler
financial times. The mechanics of reintroducing national
currencies were tractable. They no longer are.

Financial integration in the euro area is total. Borders to
financial flows don’t exist. Transactions are virtual and
instantaneous. The pattern of cross-border euro-denominated
obligations is unfathomably complex. Which of those contracts
would be redenominated? On what terms? Who would decide?

Some choices cannot be undone. In this new financial world,
short of an economic cataclysm, it is hard to know what
abandoning the euro even means.

Nonetheless, we may suffer the profound misfortune of
finding out -- unless Europe’s governments see that the only
sane choice is to accept the logic of the currency union they
created and the obligations that go with it. In the medium term,
that means closer fiscal union. In the immediate term, it means
one thing above all. The European Central Bank must be granted
whatever powers it may need to underwrite public debts across
the EU.

This is something the euro’s creators vowed would never
happen. It violates, they believed, every principle of sound
central banking. They were right: later, those principles will
have to be rewritten. Later, too, the euro area will need new
arrangements that bring fiscal union closer. Right now, though,
the euro area needs a central bank that can do for its member
countries what the Federal Reserve does for the U.S. Anything
less would be the EU’s biggest gamble yet.

(Clive Crook is a Bloomberg View columnist. The opinions
expressed are his own.)